2 Top Tyco Executives Charged With $600 Million Fraud Scheme

By ANDREW ROSS SORKIN

Published: September 13, 2002

The former chief executive and the former chief financial officer of Tyco International Ltd. were indicted yesterday on charges that they reaped $600 million through a racketeering scheme involving stock fraud, unauthorized bonuses and falsified expense accounts.

The company's former general counsel was also indicted, on charges that he falsified company records to conceal $14 million in improper loans to himself.

L. Dennis Kozlowski, 55, the son of a Newark police officer who as chief executive helped build Tyco into an international conglomerate, and Mark H. Swartz, 42, his financial adviser and second-in-command, are accused of using the money to pay for everything from an apartment on Park Avenue and homes in Boca Raton, Fla., to jewelry from Harry Winston and Tiffany's.

Among the accusations against Mr. Kozlowski are that he had the company pick up half the cost of a multimillion-dollar 40th-birthday party on the Italian island of Sardinia for his wife, a former waitress at a restaurant near Tyco's headquarters in New Hampshire.

The New York grand jury indictments -- including the charge against the former general counsel, Mark Belnick, 55, who was an investigator in the Senate's Iran-contra hearings in 1987 -- also accuse Mr. Kozlowski and Mr. Swartz of bribing a Tyco board member and several Tyco employees, apparently to try to keep their scheme secret. The indictment accuses Mr. Kozlowski and Mr. Swartz of ''enterprise corruption,'' a charge often used in Mafia prosecutions.

The indictment, as well as a separate civil lawsuit filed by the Securities and Exchange Commission, are the latest government moves against corporate executives amid a series of earnings restatements, accounting scandals and sudden bankruptcies at Enron, WorldCom, Adelphia and other big companies.

Tyco, which is nominally based in Bermuda for tax purposes but operates out of Exeter, N.H., and Boca Raton, owns dozens of companies that make products ranging from surgical instruments to security systems. It is also among the biggest suppliers of undersea fiber optic cables and electrical connectors, and it employs more than 270,000 people.

In the indictment, Robert M. Morgenthau, the Manhattan district attorney, contends that Mr. Kozlowski and Mr. Swartz created an elaborate, covert system beginning in 1995 that he called the ''top executives' criminal enterprise,'' which, he said, allowed them to spend millions of dollars in company money for personal expenses. The men then covered their tracks by limiting the scope of internal audits and bypassing the company's legal department when filing disclosure documents with the Securities and Exchange Commission, the indictment says.

The authorities accuse Mr. Kozlowski and Mr. Swartz of stealing $170 million from the company itself and reaping $430 million more by covertly selling Tyco stock while ''artificially inflating'' the value of that stock. Tyco stock has fallen 70 percent in value this year, and it closed yesterday at $17.80.

Mr. Morgenthau's office moved to freeze $600 million of assets held by Mr. Kozlowski and Mr. Swartz.

Steven M. Cutler, the director of enforcement for the Securities and Exchange Commission, called the dollar amounts in the Tyco case ''staggering.'' The civil complaint says that the case ''involves egregious, self-serving and clandestine misconduct.''

Appearing in handcuffs and looking somewhat bewildered during a court hearing yesterday, all three men pleaded not guilty to the charges. Justice Michael J. Obus of State Supreme Court in Manhattan set a personal recognizance bond of $100 million for Mr. Kozlowski and $50 million for Mr. Swartz.

Mr. Belnick, a partner at the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison before joining Tyco in 1998, was released on an unsecured personal recognizance bond of $1 million. Mr. Belnick left the firm after the death of his mentor, Arthur L. Liman, who was chief counsel to the Senate committee that investigated the sale of arms to Iran by the Reagan administration and the diversion of profits from those sales to antigovernment guerrillas in Nicaragua. Mr. Belnick was Mr. Liman's deputy at those hearings.

All three men had to surrender their passports and must return to court on Thursday.

If convicted, Mr. Kozlowski and Mr. Swartz could face up to 25 years in prison, while Mr. Belnick faces up to 4 years.

After the hearing, Mr. Kozlowski's lawyer, Stephen Kaufman, said, ''Dennis Kozlowski is a recognized business leader and believes that the charges against him are unfounded and unfair.''

Mr. Swartz's lawyer, Charles A. Stillman, portrayed his client as a victim of an overly aggressive team of prosecutors seeking to take down Mr. Kozlowski. ''Mark Swartz has been swept up in this investigation without consideration for the merits of his own individual case,'' he said. ''He is totally innocent of these charges, and we believe these charges should not have been brought against him.''

Mr. Belnick's lawyer, Reid Weingarten, said in a statement issued by his office that his client ''has done nothing wrong,'' adding, ''We are certain when this painful process ends, he will be cleared of the unsupported allegations which have been made against him.''